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| Chuck Frank |
S&T Wealth Management Group sees value in callable intermediate-term agency debentures amid a rising interest-rate environment, said Chuck Frank, v.p. and senior portfolio manager. He manages $115 million in taxable investment-grade fixed-income from Indiana, Pa. "Even though the bond market has been stable, if you go out to five-year non-call three months, you get 105 basis points over Treasuries--and it was 95bps over a month ago," he noted, explaining spreads continue to be attractive in the callable agency space. He added seven-year non-call three month agency paper has widened to 120bps over Treasuries from 105bps over the previous month. Frank estimated roughly $750,000 worth of his holdings has been called in the last three months and he has been able to reinvest at comparable yields, lending him a stable rate of return. Government securities comprise around 83% of S&T's portfolio, with less then 1% in Treasuries. "I've got to take a 1% management fee, plus have money left over for our customers," Frank noted, explaining Treasuries do not offer enough yield to make them attractive. The balance of his portfolio lies in corporates, though he has not added to his credit holdings recently. "We only get into corporates when there's a significant yield spread over governments," Frank said, explaining he hasn't added to his corporate allocation in years.
Frank describes his philosophy as macro-economically driven. "Our process is to invest in investment-grade intermediate term fixed-income and diversify rate risk: we take call risk when rates are low and when rates are high, we call protect," he stated. He anticipates the Federal Reserve will raise rates to 3 1/2 to 3 3/4% by the end of the year but is nearing the end of its rate hikes. S&T looks at the Merrill Lynch 3-5 Year Index but does not base his strategy on it.
